Canada Q1 2009 construction pipeline summary

May 05, 09 | 1:57 am

PIPELINE OVERVIEW

Canada's Total Construction Pipeline peaked in Q1 2008 at 265 projects/ 33,964 rooms. The Pipeline has declined each quarter since then, with Q1 2009 ending at 228 projects/27,278 rooms. This is a total decline of 14% by projects and 20% by rooms from the peak. Reflecting the softening economy, Total Pipeline counts are likely to continue this downward trend at least into late 2010.

The recession in Canada is not based on a banking or housing crisis and consequently is not as deep or pronounced as it is in other developed regions, such as the US or Europe. Canada has also not seen the rapid real estate devaluation that is marking recessions in other countries. Rather it is a normal recession, based on a ripple effect generated by a variety of factors including the decline of business and consumer spending, a fall-off in exports and drops in world commodity prices, particularly oil and timber. Inbound travel from the US is also a contributor, having recently reached new lows. There are drops in travel from Europe and Asia as well.

Unlike in other global regions, Canada's Pipeline is not weighted at the front end, but spread out fairly evenly. Approximately 36% of total Pipeline proj­ects are Under Construction. Another 32% of projects are Scheduled to Start in the Next 12 Months and 32% are in the Early Planning stage. Scheduled Starts and Early Planning are in rapid decline due to the rise in cancellations and postponements of projects already in the Pipeline and growing devel­oper caution about announcing new projects. In the current economic climate, developers have become more conservative.

Small and mid-market projects in the select service segments dominate the Pipeline. It is easier to obtain financing for these smaller projects, particularly with a recognizable brand. 81% of projects in the Pipeline are smaller than 200 rooms, with an overall average project size of 120 rooms. At 32% of total projects, the Midscale without Food & Beverage segment makes up a sizeable portion of the branded Pipeline, followed closely by Upscale (23%) and Economy (22%). There is also notable extended stay development in each of these chain scales. 84% of all Pipeline projects have already selected a brand. 70% of the remaining projects are likely to choose a brand prior to opening.

KEY PIPELINE METRICS

Because the banking system is strong and financing for lodging has remained available, up until now the migration of projects up the Pipeline toward Con­struction has remained relatively consistent. Construction Starts in Q1 are at 22 projects/1,905 rooms. Growing developer concern over the deterioration of the economic environment and the onset of a recession has prompted a recent spike in Cancellations/Postponements. Now at 23 projects/3,423 rooms, they remain at cyclical highs. New Project Announcements (NPA's) into the Pipeline accelerated in Q4 2008 as developers and franchise companies rushed to announce their projects before year-end. At 27 projects/2,649 rooms in Q1, NPA's have dropped and are likely to now settle into a lower bottoming channel moving forward.

FORECAST FOR NEW HOTEL OPENINGS

In 2008, 65 new hotels/7,700 rooms opened, resulting in a gross growth rate of 2.8% before removals from inventory. New Hotel Openings are in a topping out formation and will remain steady for the next 2 years. In Q1, 12 hotels/1,330 rooms came online, with a further 56 hotels/6,466 rooms expected in the remaining three quarters, for a total 2009 gross growth rate of 2.7%. 2010 is slated to bring 67 hotels/7,755 rooms to supply for a gross growth rate of 2.6%. LE's Forecast for New Openings has been adjusted downward to account for the falling economy and the increase in Cancellations/Postponements over the last two quarters. Further downward adjustments may be necessary if Cancellations/Postponements continue at their current pace.

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